Fitch Ratings has revised the outlook on the operating environment (OE) score for Panamanian banks to Stable from Negative and affirmed the OE score at ‘bb+’. The challenges faced by the Panamanian banking system have been easing gradually, with credit growth, asset quality and profitability metrics performing better than expected.
The improved business conditions are meaningful to the stabilization of the OE score outlook, as are easing challenges from high financing costs and persistent pressures on loan quality. We forecast a reacceleration in Panamanian real GDP growth to 4% in 2025, following an upward revision to 2.8% for 2024 from 1.5%. The principal lending sectors for both private- and state-owned banks have either improved or maintained stable asset quality so far in 2024.
GDP growth recovery in 2025 is supportive of credit growth. However, we expect Panamanian banks to continue to prioritize asset quality and financial profile stability. Loans to regional clients accounted for 27.5% of the banking system’s total gross loans as of August 2024, up from 20.1% at end-2020. Most of these foreign clients are Latin American corporations with strong profiles in their local markets that provide higher yields than those that can be obtained from domestic clients, given the greater country risk. Foreign loans accounted for nearly half of YoY loan growth as of August 2024, up 12.9% YoY, while loans to local clients grew 5.0%.
The banking system’s loan quality should continue to improve despite pressures from Panama’s economic slowdown in 2024 and legacy restructured loans. NPLs marginally improved to 2.50% of gross loans as of June 2024, from 2.57% in December 2023. Loans in substandard, doubtful, and loss categories fell over the same period to 5.02% of gross loans from 5.33%.
Banks are continuing to grow loans in moderate risk sectors, resulting in stable credit quality, avoiding risker segments such as construction or agriculture. In August 2024, the NPL ratio for loans to the commercial sector remained at 2.1%, mortgages at 4.1%, and consumer loans improved to 2.6% from 2.9% in December 2023. Financial institution loans remained at 0.2%, and industrial loans improved to 0.4% from 0.5%.
We expect global USD interest rates to fall further through 2025, which should help to ease funding costs over the medium term. However, historically Panamanian interest rate trends have lagged, and further increases in funding costs could pressure net interest margins in the near term. As Fitch expected, net interest margins peaked in 2024 due to limited room for loan repricing without affecting quality. However, bank profitability improved slightly, due to higher non-interest operating income and low loan impairment charges.
Panama’s sovereign rating of ‘BB+’ constrains the OE score for banks. As per Fitch’s criteria, the OE score is unlikely to be above the sovereign rating unless the sovereign rating is very low (CCC category or below). Panama’s implied OE remains in the ‘bbb’ category, driven by its relatively high GDP per capita of $18,700 and a Fitch Solutions Operational Risk Index percentile rank of 62.6.